[Federal Register Volume 81, Number 37 (Thursday, February 25, 2016)]
[Rules and Regulations]
[Pages 9333-9338]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-04005]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9753]
RIN 1545-BL84
Amendments to the Low-Income Housing Credit Compliance-Monitoring
Regulations
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final and temporary regulations.
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SUMMARY: This document contains final and temporary regulations
relating to the compliance-monitoring duties of a State or local
housing credit agency for purposes of the low-income housing credit.
The final and temporary regulations revise and clarify the requirement
to conduct physical inspections and review low-income certifications
and other documentation. The final and temporary regulations will
affect State or local housing credit agencies. The text of these
temporary regulations also serves as the text of the proposed
regulations (REG-150349-12) set forth in the notice of proposed
rulemaking on this subject in the Proposed Rules section in this issue
of the Federal Register.
DATES:
Effective date: These regulations are effective on February 25,
2016.
Applicability date: For dates of applicability, see Sec. 1.42-
5T(h)(2).
FOR FURTHER INFORMATION CONTACT: Jian H. Grant, (202) 317-4137, and
Martha M. Garcia, (202) 317-6853 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document amends 26 CFR part 1 to revise and clarify rules
relating to section 42 of the Internal Revenue Code (Code). On March 5,
2012, the Treasury Department and the IRS published Notice 2012-18,
2012-10 IRB 438. Notice 2012-18 informed State and local housing credit
agencies participating in a physical inspections pilot program of an
alternative method for satisfying certain inspection and review
responsibilities under Sec. 1.42-5(c)(2) for projects for which the
Department of Housing and Urban Development (HUD) conducted physical
inspections.\1\ Notice 2012-18 also requested comments on various
issues relating to Sec. 1.42-5. The Treasury Department and the IRS
received written and electronic comments in response. After
consideration of all of the comments received, the Treasury Department
and the IRS are issuing these final and temporary regulations.
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\1\ Notice 2014-15, 2014-12 IRB 661, extended permission through
December 31, 2014, for State and local housing credit agencies to
use the alternative method in Notice 2012-18.
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This document also updates the authority citation of 26 CFR part 1.
The Omnibus Budget Reconciliation Act of 1989 (Pub. L. 101-239) re-
designated section 42(m) of the Code as section 42(n). The updates in
this document reflect that re-designation.
General Overview
Section 42 provides rules for determining the amount of the low-
income housing credit, which section 38 allows as a credit against
income tax. Section 42(a) provides that the amount of the low-income
housing credit for any taxable year in the credit period is an amount
equal to the applicable percentage of the qualified basis of each
qualified low-income building. Section 42(c)(2) defines a qualified
low-income building as any building that is part of a qualified low-
income housing project at all times during the compliance period (the
period of 15 taxable years beginning with the first taxable year of the
credit period).
Section 42(g)(1) defines a qualified low-income housing project as
any project for residential rental property if the project meets one of
the following tests, as elected by the taxpayer:
(A) At least 20 percent of the residential units in the project are
rent-restricted and occupied by individuals whose income is 50 percent
or less of area median gross income; or
(B) At least 40 percent of the residential units in the project are
rent-restricted and occupied by individuals whose income is 60 percent
or less of area median gross income.
In general, under section 42(i)(3)(A), a low-income unit is a
residential unit that is rent-restricted and the occupants of which
meet the applicable income limit elected by the taxpayer as described
in section 42(g)(1)(A) or (B).
Under section 42(i)(3)(B)(i), a unit is not treated as a low-income
unit unless it is suitable for occupancy and used other than on a
transient basis. Under section 42(i)(3)(B)(ii), the suitability of a
unit for occupancy must be determined under regulations prescribed by
the Secretary taking into account local health, safety, and building
codes. Failure of one or more units to qualify as low-income units may
result in a project's ineligibility for the low-income housing credit,
reduction in the amount of the credit, and/or recapture of previously
allowed credits.
Under section 42(m)(1), the owners of an otherwise-qualifying
building are not entitled to low-income housing credits that are
allocated to the building unless, among other requirements, the
allocation is pursuant to a qualified allocation plan (QAP). A QAP
provides standards by which a State or local housing credit agency or
its Authorized Delegate within the meaning of Sec. 1.42-5(f)(1)
(``Agency'') will make these allocations. A QAP also provides a
procedure that an Agency must follow in monitoring for compliance with
the provisions of section 42. A plan fails to be a QAP unless, in
addition to other requirements, it--
provides a procedure that the agency (or an agent or other private
contractor of such agency) will follow in monitoring for
noncompliance with the provisions of [section 42] and in notifying
the Internal Revenue Service of such noncompliance which such agency
becomes aware of and in monitoring for noncompliance with
habitability standards through regular site visits.
Section 42(m)(1)(B)(iii).
Section 1.42-5 (the compliance-monitoring regulations) describes
some of the provisions that must be part of any QAP. As part of its
compliance-monitoring responsibilities, an Agency must perform physical
inspections and low-income certification review.
The compliance-monitoring regulations specifically provide that,
for each low-income housing project, an Agency must conduct on-site
inspections of all buildings by the end of the second calendar year
following the year the last building in the project is placed in
service (the all-buildings requirement). In addition, prior to the
amendments in this document, the regulations provided that, for at
least 20 percent of the project's low-income units (the 20-percent
rule), the Agency must both inspect the units and review the low-income
certifications, the documentation supporting the certifications, and
the rent records for the tenants in those same units (the same-units
requirement). The
[[Page 9334]]
regulations provide that the Agency must also conduct on-site
inspections and low-income certification review at least once every 3
years after the initial on-site inspection. Further, the regulations
require the Agency to randomly select which low-income units and tenant
records to inspect and review (the random-selection rule). The
regulations also require the Agency to choose the low-income units and
tenant records in a manner that will not give owners of low-income
housing projects advance notice that a unit and tenant records for a
particular year will or will not be inspected and reviewed (the no-
notice rule). However, an Agency may give an owner reasonable notice
that an inspection of the building and low-income units or tenant
record review will occur so that the owner may notify tenants of the
inspection or assemble tenant records for review (for example, 30-day
notice of inspection or review).
Summary of Comments and Explanation of Provisions
Use of the REAC Protocol, Physical Inspections, and Low-Income
Certification Reviews
Notice 2012-18 asked whether the 20-percent rule for both physical
inspections and low-income certification review is appropriate,
including whether this percentage appropriately balances the IRS's
compliance concerns against the desirability of reducing the inspection
burden on Agencies, tenants, and building owners; whether the
percentage should vary depending on the type of inspection the Agencies
are performing; and whether the percentage should vary with the number
of units in a building.
Notice 2012-18 also asked whether the regulations should provide an
exception from the inspection provisions of Sec. 1.42-5(d) for
inspections done under the HUD Real Estate Assessment Center protocol
(REAC protocol) similar to the exception under Sec. 1.42-5(d)(3) for
inspections performed by the Rural Housing Service under the section
515 program. Notice 2012-18 had permitted use of the REAC protocol by
participants in an inter-Departmental physical inspections pilot
program that sought to align the section 42 physical inspection
requirements with the physical inspection requirements under HUD
programs.
Several commenters asserted that the 20-percent rule is
appropriate. Others claimed that it is overly burdensome for larger
properties (30 units or more). Several commenters suggested that the
regulations permit an Agency to satisfy the physical inspection
requirement by using the REAC protocol. These commenters generally
suggested that availability of the REAC protocol for physical
inspections would promote flexibility and lessen burden. Allowing an
Agency to use the REAC protocol for purposes of the section 42 physical
inspection requirements would eliminate the need for multiple Federal
inspections on the same property if the property also benefits from HUD
programs. Additionally, for larger properties, the minimum number of
low-income units that an Agency must inspect under the REAC protocol
may be fewer than under the 20-percent rule.
In response to the comments received, the final and temporary
regulations authorize the IRS to specify in guidance published in the
Internal Revenue Bulletin the minimum number of low-income units for
which an Agency must conduct physical inspections and low-income
certification review. Rev. Proc. 2016-15, which is being issued
concurrently with these regulations, provides that, in a low-income
housing project, the minimum number of low-income units that must
undergo physical inspection is the lesser of 20 percent of the low-
income units in the project, rounded up to the nearest whole number of
units, or the number of low-income units set forth in the Low-Income
Housing Credit Minimum Unit Sample Size Reference Chart in the revenue
procedure. The revenue procedure applies the same rule to determine the
minimum number of units that must undergo low-income certification
review. An Agency is free to conduct physical inspections or low-income
certification review on a larger number of low-income units if it
believes that to be appropriate.
The Treasury Department and the IRS, however, are concerned about
application of this 20 percent rule in some situations. For projects
with a relatively smaller number of low-income units, physical
inspection or low-income certification review of a randomly chosen 20
percent of those units may not produce a sufficiently accurate estimate
of the remaining units' overall compliance with habitability or low-
income requirements. Accordingly, not later than when these temporary
regulations are finalized, the Treasury Department and the IRS intend
to consider whether Rev. Proc. 2016-15 should be replaced with a
revenue procedure that does not permit use of the 20 percent rule in
those circumstances.
In response to Notice 2012-18's request for comments on whether the
IRS should provide an exception from the inspection provisions of Sec.
1.42-5(d) for inspections done under the REAC protocol, commenters
generally supported creating such an exception. The final and temporary
regulations, however, do not fully adopt this suggestion. Instead, the
regulations authorize the IRS to provide in guidance published in the
Internal Revenue Bulletin exceptions from, or alternative means of
satisfying, the inspection provisions of Sec. 1.42-5(d). Rev. Proc.
2016-15 provides that the REAC protocol is among the inspection
protocols that satisfy both Sec. 1.42-5(d) and the physical inspection
requirements of Sec. 1.42-5T(c)(2)(ii) and (iii). The revenue
procedure contains a rigorous definition of which inspection regimes it
will treat as being the REAC protocol for this purpose. Comments are
requested on all aspects of the provisions in the revenue procedure
that define ``performed under the REAC protocol'' for purposes of
satisfying Sec. Sec. 1.42-5(d) and 1.42-5T(c)(2)(ii) and (iii).
Because vacant low-income units contribute to a building's
qualified basis, both occupied and vacant low-income units in a low-
income housing project must be included in the population of units from
which units are selected for inspection. This is the case even if the
vacant unit or units may be temporarily unsuitable for occupancy as a
result of work that is being done to repair or rehabilitate the unit or
units. See Sec. 1.42-5(e)(4). Potential inspection of vacant units is
the rule for all compliance-monitoring inspections that do not use the
REAC protocol, and Rev. Proc. 2016-15 therefore requires similar
treatment when an Agency conducts a physical inspection under the REAC
protocol.
Some commenters recommended using a risk-based assessment model in
place of the 20-percent rule. Such a model would determine the
frequency of inspections and the number of low-income units to inspect
based on the probability of noncompliance of a low-income housing
project. The probability of noncompliance would be determined for this
purpose by the degree of compliance of the project over one or more
prior years. The final and temporary regulations do not adopt this
approach. However, in response to the request for comments on these
temporary regulations, commenters wishing to renew this suggestion
should provide both greater detail regarding the suggested risk-based
procedure and a thorough justification for that procedure, including
why a multi-year approach fits within the compliance requirements of
section 42.
[[Page 9335]]
Several commenters suggested modifying the 20-percent rule by
requiring more units for the initial physical inspection than for the
subsequent physical inspections on the ground that a comprehensive
initial physical inspection establishes a baseline of compliance for a
low-income housing project. By contrast, some commenters suggested
requiring more units for the subsequent physical inspections, asserting
that the quality of compliance of a low-income housing project often
decreases after the initial physical inspection. These comments,
however, did not provide sufficient analysis to justify increasing the
number of units to be inspected in either the initial or a subsequent
inspection. Without a reasonable basis for doing so, requiring more
units for either the initial or subsequent inspections would
unreasonably increase the administrative burden on Agencies, owners,
and tenants of low-income housing projects. The final and temporary
regulations, therefore, do not adopt these suggestions. Commenters
wishing to renew either of these suggestions should provide both
greater detail and a thorough justification for the suggestion.
On the question of whether the required percentage of low-income
units should vary depending on the type of compliance review (physical
inspection or low-income certification review), one commenter
recommended against a varying percentage, stating that there is no
compelling reason for the required percentage to vary. A second
commenter suggested that, in order to assess tenant eligibility, an
Agency should review more than 20 percent of the low-income
certifications because noncompliance relating to tenant eligibility may
be harder to detect than noncompliance relating to habitability. The
final and temporary regulations adopt the first commenter's suggestion.
Just as an Agency may always physically inspect more than the minimum
number of units, if an Agency deems it appropriate, the Agency may
always review more than the minimum number of low-income certifications
in a project to assess tenant eligibility. Commenters wishing to renew
comments on this issue should provide both greater detail and a
thorough justification for their suggestion.
Two commenters suggested that the regulations not impose an all-
buildings requirement for physical inspection, but merely require an
Agency to apply the physical inspection and low-income certification
review requirements on a project-wide basis. According to these
commenters, an all-buildings requirement can make the inspection
process overly burdensome, particularly in rural areas where projects
often consist of small buildings such as single-unit buildings,
duplexes, or triplexes. The final and temporary regulations do not
fully adopt this suggestion. The regulations continue to require that
Agencies comply with the all-buildings requirement unless guidance
published in the Internal Revenue Bulletin pursuant to Sec. 1.42-
5T(a)(iii) provides otherwise.
Rev. Proc. 2016-15 does provide for such an exception. Under Rev.
Proc. 2016-15, the all-buildings requirement does not apply to an
Agency that uses the REAC protocol, under HUD oversight, to satisfy the
physical inspection requirement (although the REAC protocol itself may
require inspection of all buildings in certain cases). The rigor with
which Rev. Proc. 2016-15 defines the REAC protocol justifies this
exception. Among the requirements set forth in the revenue procedure is
the requirement that a physical inspection performed under the REAC
protocol utilize the standards adopted, and inspectors certified, by
HUD. Inspections performed under the REAC protocol or by the Rural
Housing Service under the section 515 program require federal agency
oversight. Thus, such oversight substitutes for an all-buildings
requirement for inspection. Similar to inspections performed by the
Rural Housing Service under the section 515 program, inspections
performed under the REAC protocol are not subject to an all-buildings
requirement. A physical inspection that the revenue procedure treats as
being performed under the REAC protocol also involves the use of the
most recent REAC UPCS inspection software, which has a strong
statistical basis. Therefore, under the revenue procedure, the REAC
protocol is an acceptable method for satisfying both Sec. 1.42-5(d)
and the physical inspection requirement of Sec. 1.42-5T(c)(2)(ii) and
(iii). If, in the future, the Treasury Department and the IRS become
persuaded that there are one or more additional suitable alternatives
to the all-buildings requirement, they may provide one or more
additional exceptions to that requirement.
A commenter suggested that the regulations permit an Agency to
treat multiple buildings with a common owner and plan of financing as a
single low-income housing project, regardless of whether the owner has
elected this treatment under section 42(g)(3)(D). The final and
temporary regulations do not adopt this suggestion. Section 42(c)(2)(A)
defines a ``qualified low-income building'' as, in part, any building
that is part of a qualified low-income housing project at all times
throughout the compliance period. Section 42(g) defines a ``qualified
low-income housing project'' as any project for residential rental
property if the project meets the requirements of section 42(g)(1)(A)
or (B), whichever is elected by the taxpayer. The scope of the term
``qualified low-income housing project'' for purposes of physical
inspections should be the same as for other purposes under section 42.
Decoupling of the Physical Inspection and Low-Income Certification
Review Requirements (Ending the Same-Units Requirement)
Notice 2012-18 asked for comments on whether permitting physical
inspection and low-income certification review of different low-income
units (that is, ending the same-units requirement) would simplify the
inspection process. The notice also asked for comments on whether
ending the requirement would impair the value of the data obtained. One
commenter asserted that the current rule of requiring physical
inspection and low-income certification review of the same low-income
units is effective in finding noncompliance on a particular unit. Most
commenters, however, believed that decoupling of the physical
inspection and low-income certification review requirements would
reduce the administrative burden, better preserve the surprise element,
and likely increase the coverage of compliance-monitoring.
In response to these comments, the final and temporary regulations
end the same-units requirement by decoupling the physical inspection
and low-income certification review. Therefore, an Agency is no longer
required to conduct physical inspection and low-income certification
review on the same units. Because the units no longer need to be the
same, an Agency may choose a different number of units for physical
inspection and for low-income certification review, provided the Agency
chooses at least the minimum number of low-income units in each case.
If an Agency chooses to select different low-income units for physical
inspections and low-income certification review, the Agency must select
the units for physical inspection or low-income certification review
separately and in a random manner.
Further, because the units no longer need to be the same, an Agency
may choose to conduct physical inspection and low-income certification
review at different times. For example, if HUD requires a physical
inspection only two years after a joint HUD/low-income
[[Page 9336]]
housing credit inspection, that second inspection may be used for both
HUD and low-income housing credit purposes without accelerating the
next low-income housing credit file review. (Thereafter, physical
inspections performed every third year might take place a year before
the every-three-year file reviews.) Also, an Agency may choose to
conduct physical inspections in the summer but complete the low-income
certification review in the winter when physical inspections may be
difficult to conduct due to weather conditions. The inspections and
reviews, however, must satisfy the applicable timeliness requirements
of Sec. 1.42-5T(c)(2)(ii)(A)(1) and (2).
In addition, to make meaningful the physical inspection and low-
income certification review, the final and temporary regulations retain
the random-selection rule and strengthen the no-notice rule.
Accordingly, if an agency decides to decouple the physical inspection
and low-income certification review, the Agency may not allow selection
of a low-income unit for physical inspection (or low-income
certification review) to influence the likelihood that the same unit
will be selected (or will not be selected) for low-income certification
review (or physical inspection).
Whether or not an Agency is selecting the same units for inspection
and for low-income certification review, the Agency may give an owner
reasonable notice that an inspection of the building and low-income
units or review of low-income certifications will occur. This notice
enables the owner to notify tenants of the inspection or to assemble
low-income certifications for review. The regulations provide that
reasonable notice is generally no more than 30 days, but they also
provide a very limited extension for certain extraordinary
circumstances beyond an Agency's control such as natural disasters and
severe weather conditions.
Thus, under the final and temporary regulations, if an Agency
chooses to select the same units for physical inspections and low-
income certification review, the Agency may conduct physical
inspections and low-income certification review either at the same time
or separately. However, once the Agency informs the owner of the
identity of the units for which physical inspections or low-income
certification review will occur, the Agency must conduct the physical
inspections and low-income certification review within the reasonable-
notice time frame described in the preceding paragraph.
Comments are requested on these aspects of the regulations. For
example, comments are requested on whether the same maximum amount of
notice is reasonable for physical inspections and low-income
certification review. Comments are also requested on whether, for
physical inspections, the reasonable-notice time frame should be
shortened. For example, under the REAC protocol, an inspector provides
a 15-day notice of an upcoming HUD inspection to the owner and/or
manager of the building and same-day notice of which units are to be
inspected.
Possible Changes in the Minimum Size of Samples
The Treasury Department and the IRS believe the methods in Rev.
Proc. 2016-15 reasonably balance the burden on Agencies, tenants, and
building owners while adequately monitoring compliance. However,
additional comments may be submitted on other possible methods,
including stratified sampling procedures and estimation methodologies.
To be useful, any such comments should include substantial detail
regarding the procedures to be adopted and should provide thorough
justification as to whether the suggested methods effectively reduce
burden without negatively impacting the confidence that can be placed
in the results obtained from the resulting samples.
Revision to Frequency and Form of Certification
The final and temporary regulations revise the rules currently in
Sec. 1.42-5(c)(3) to clarify that a monitoring procedure must require
that the owner certifications in Sec. 1.42-5(c)(1) be made to and
reviewed by the Agency at least annually covering each year of the 15-
year compliance period.
Effective/Applicability Dates
The temporary regulations apply on February 25, 2016 and expire on
February 22, 2019. Agencies using the REAC protocol as part of the
physical inspections pilot program may rely on the temporary
regulations for on-site inspections and low-income certification review
occurring between January 1, 2015 and February 25, 2016.
Statement of Availability of IRS Documents
IRS Revenue Procedures, Revenue Rulings notices, notices and other
guidance cited in this document are published in the Internal Revenue
Bulletin (or Cumulative Bulletin) and are available from the
Superintendent of Documents, U.S. Government Printing Office,
Washington, DC 20402, or by visiting the IRS Web site at http://www.irs.gov.
Special Analyses
Certain IRS regulations, including this one, are exempt from the
requirements of Executive Order 12866, as supplemented and reaffirmed
by Executive Order 13563. Therefore, a regulatory impact assessment is
not required. It has also been determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to
these regulations, and because these regulations do not impose a
collection of information on small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of
the Internal Revenue Code, these regulations have been submitted to the
Chief Counsel for Advocacy of the Small Business Administration for
comment on their impact on small business.
Drafting Information
The principal authors of these regulations are Jian H. Grant and
Martha M. Garcia, Office of the Associate Chief Counsel (Passthroughs
and Special Industries). However, other personnel from the Treasury
Department and the IRS participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by
removing the entries for Sec. Sec. 1.42-1T and 1.42-2T and by adding
and revising entries in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.42-1T also issued under 26 U.S.C. 42(n).
Section 1.42-2 also issued under 26 U.S.C. 42(n).
Section 1.42-5T also issued under 26 U.S.C. 42(n).
0
Par. 2. Section 1.42-5 is amended by:
0
1. Adding paragraph (a)(2)(iii).
0
2. Revising paragraphs (c)(2)(ii) and (iii) and (c)(3).
0
3. Revising the paragraph heading of paragraph (h), redesignating the
text of paragraph (h) as paragraph (h)(1) and adding a paragraph (h)(1)
heading, and adding paragraph (h)(2).
0
4. Adding paragraph (i).
The additions and revisions read as follows:
[[Page 9337]]
Sec. 1.42-5 Monitoring compliance with low-income housing credit
requirements.
(a) * * *
(2) * * *
(iii) [Reserved]. For further guidance, see Sec. 1.42-
5T(a)(2)(iii).
* * * * *
(c) * * *
(2) * * *
(ii) [Reserved]. For further guidance, see Sec. 1.42-5T(c)(2)(ii).
(iii) [Reserved]. For further guidance, see Sec. 1.42-
5T(c)(2)(iii).
(3) [Reserved]. For further guidance, see Sec. 1.42-5T(c)(3).
* * * * *
(h) Effective/applicability dates--(1) In general.* * *
(2) [Reserved]. For further guidance, see Sec. 1.42-5T(h)(2).
(i) [Reserved]. For further guidance, see Sec. 1.42-5T(i).
0
Par. 3. Section 1.42-5T is added to read as follows:
Sec. 1.42-5T Monitoring compliance with low-income housing credit
requirements (temporary).
(a)(1) through (a)(2)(ii) [Reserved]. For further guidance, see
Sec. 1.42-5(a)(1) through (a)(2)(ii).
(iii) Effect of guidance published in the Internal Revenue
Bulletin. Guidance published in the Internal Revenue Bulletin (see
Sec. 601.601(d)(2)(ii)(b) of this chapter) may provide--
(A) Exceptions to the requirements referred to in Sec. 1.42-
5(a)(2)(i) and the requirements described in this section; or
(B) Alternative means of satisfying those requirements.
(b) through (c)(2)(i) [Reserved]. For further guidance, see Sec.
1.42-5(b) through (c)(2)(i).
(ii) Require that, with respect to each low-income housing project,
the Agency conduct on-site inspections and review low-income
certifications (including in that term the documentation supporting the
low-income certifications and the rent records for tenants).
(iii) Require that the on-site inspections that the Agency must
conduct satisfy both the requirements of Sec. 1.42-5(d) and the
requirements in paragraph (c)(2)(iii)(A) through (D) of this section,
and require that the low-income certification review that the Agency
must perform satisfies the requirements in paragraphs (c)(2)(iii)(A)
through (D) of this section. Paragraph (c)(2)(iii)(A) through (D) of
this section provides rules determining how these on-site inspection
requirements and how these low-income certification review requirements
may be satisfied by an inspection or review, as the case may be, that
includes only a sample of the low-income units.
(A) Timing. The Agency must conduct on-site inspections of all
buildings in the low-income housing project and must review low-income
certifications of the low-income housing project--
(1) By the end of the second calendar year following the year the
last building in the low-income housing project is placed in service;
and
(2) At least once every 3 years thereafter.
(B) Number of low-income units. The Agency must conduct on-site
inspections and low-income certification review of not fewer than the
minimum number of low-income units required by guidance published in
the Internal Revenue Bulletin. See Sec. 601.601(d)(2)(ii)(b) of this
chapter.
(C) Selection of low-income units for inspection and low-income
certifications for review--(1) Random selection. The Agency must select
in a random manner the low-income units to be inspected and the units
whose low-income certifications are to be reviewed. The Agency is not
required to select the same low-income units of a low-income housing
project for on-site inspections and low-income certification review,
and an Agency may choose a different number of units for on-site
inspections and for low-income certification review, provided the
Agency chooses at least the minimum number of low-income units in each
case. If the Agency chooses to select different low-income units for
on-site inspections and low-income certification review, the Agency
must select the units for on-site inspections or low-income
certification review separately and in a random manner.
(2) Advance notification limited to reasonable notice. The Agency
must select the low-income units to inspect and low-income
certifications to review in a manner that will not give advance notice
that a particular low-income unit (or low-income certifications for a
particular low-income unit) for a particular year will or will not be
inspected (or reviewed). However, the Agency may give an owner
reasonable notice that an inspection of the building and low-income
units or review of low-income certifications will occur. The notice is
to enable the owner to notify tenants of the inspection or to assemble
low-income certifications for review.
(3) Meaning of reasonable notice. For purposes of paragraph
(c)(2)(iii)(C)(ii) of this section, reasonable notice is generally no
more than 30 days. The notice period begins on the date the Agency
informs the owner of the identity of the units for which on-site
inspections or low-income certification review will or will not occur.
Notice of more than 30 days, however, may be reasonable in
extraordinary circumstances that are beyond an Agency's control and
that prevent an Agency from carrying out within 30 days an on-site
inspection or low-income certification review. Extraordinary
circumstances include, but are not limited to, natural disasters and
severe weather conditions. In the event of extraordinary circumstances
that result in a reasonable-notice period longer than 30 days, an
Agency must conduct the on-site inspection or low-income certification
review as soon as practicable.
(4) Applicability of reasonable notice limitation when the same
units are chosen for inspection and file review. If the Agency chooses
to select the same units for on-site inspections and low-income
certification review, the Agency may conduct on-site inspections and
low-income certification review either at the same time or separately.
The Agency, however, must conduct both the inspections and review
within the reasonable-notice period described in paragraph
(c)(2)(iii)(C)(2) and (3) of this section.
(D) Method of low-income certification review. The Agency may
review the low-income certifications wherever the owner maintains or
stores the records (either on-site or off-site).
(3) Frequency and form of certification. A monitoring procedure
must require that the certifications and reviews of Sec. 1.42-5(c)(1)
and (c)(2)(i) be made at least annually covering each year of the 15-
year compliance period under section 42(i)(1). The certifications must
be made under penalty of perjury. A monitoring procedure may require
certifications and reviews more frequently than every 12 months,
provided that all months within each 12-month period are subject to
certification.
(c)(4) through (h)(1) [Reserved]. For further guidance, see Sec.
1.42-5(c)(4) through (h)(1).
(2) Effective/applicability dates of the REAC inspection protocol.
The requirements in paragraphs (a)(2)(iii), (c)(2)(ii) and (iii), and
(c)(3) of this section apply beginning on February 25, 2016. Agencies
using the REAC inspection protocol of the Department of Housing and
Urban Development as part of the Physical Inspections Pilot Program may
rely on these provisions for on-site inspections and low-income
certification review occurring between January 1, 2015 and February 25,
2016. Otherwise, for the rules that apply before February 25, 2016, see
Sec. 1.42-5 as
[[Page 9338]]
contained in 26 CFR part 1 revised as of April 1, 2015.
(i) Expiration date. The applicability of this section expires on
February 22, 2019.
John Dalrymple.
Deputy Commissioner for Services and Enforcement.
Approved: January 29, 2016.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2016-04005 Filed 2-23-16; 4:15 pm]
BILLING CODE 4830-01-P